Individual Taxation
The primary objective of the federal income tax law is to raise revenue. What are its secondary objectives?
a. Economic objectives such as stimulating private investment, reducing unemployment, and mitigating the effects of inflation.b. Encouraging certain activities such as research and development and small business investment.c. Social and public policy objectives, (e.g. encouraging charitable contributions and discouraging illegal bribes)
Distinguish between taxpaying entities and flow through entities from the stand point of the federal income tax law.
From the standpoint of the federal income tax law, taxpaying entities are required to pay income taxes on their taxable incomes From the standpoint of the federal income tax law, flow-through entities do not directly pay income taxes on their taxable income but pass the income on to taxpaying entities The major taxpaying entities are • Individuals • C corporations (regular corporations)The major flow-through entities are • Sole proprietorship • Partnerships • S corporations • Limited Liability Company (LLC) • Limited liability Partnership (LLP) • Trusts Some entities are hybrid entities and do not fall within either category. For example, S corporations are subject to income taxes in some situations.
Indicate which of the following taxes are generally progressive, proportional, or regressive: a. state income taxes b. Federal estate tax c. Corporate state franchise tax d. property taxes e. state and local sales taxes
a. Progressive b. Progressive c. Proportional d. Proportional e. Proportional The individual and corporate income taxes and the estate tax are all progressive. By contrast, excise taxes are regressive, as are payroll taxes for Social Security and Medicare.
Sally and Tom are married, have three young children, and file a joint return in 2020. If they have adjucted gross income (AGI) of $90,000 and itemized deductions of $10,000, what is their taxable income for 2020?
1) Taxable Income : = AGI - Standard Deduction / Itemized Deduction. = $ 90,000 - $ 24,800 =$ 65,200 2) As per IRS Taxpayer can either deduct standard deduction or itemized deduction whichever is more. 3) Here, standard deduction is $ 24,800 for married filling jointly whereas itemized deduction is $ 10,000. Therefore we have deducted standard deduction.
Most estates are not subject to the federal estate tax. Why is this the case? Do you believe most estates should be subject to the federal estate tax
A taxpayer enjoys decent credit and deduction provisions available. This is the reason why most taxpayers do not have to pay the federal estate tax for their estates. The deductions provisions include the unified tax credit and the unlimited marital deduction. The amount of the unified tax credit in 2013 is $5,250,000. This means, in 2013, if the estate value is not more than $5,250,000, then the taxpayer does not have to pay federal estate tax. It is correct that most taxpayers do not have to pay federal estate taxes. The taxpayer has already paid his income taxation, the sale tax, and the property tax for his estates. It is not reasonable to charge his decedents twice for the same estate. Thus, the estate tax is a double tax and hence should be basically reduced or even eliminated.
Cathy, who is single, makes gifts of $50,000 to each of her two adult children. Who is primarily liable for the gift tax on the two gifts, Cathy or the two children? If Cathy has never made a taxable gift in prior years, is a gift tax due on the two gifts?
Cathy, the donor, is primarily liable for the gift tax on the two gifts. The children are contingently liable for payment of the gift tax in the event the donor fails to pay. Yes, a gift tax must be considered on the two gifts. She is permitted a $15,000 annual exclusion for gifts of a present interest to each donee. Since Cathy has never made a taxable gift, no gift tax will be due because of the unified credit that is available. The $11.7 million exemption applies to gifts and estate taxes combined—whatever exemption you use for gifting will reduce the amount you can use for the estate tax. The IRS refers to this as a "unified credit." Each donor (the person making the gift) has a separate lifetime exemption that can be used before any out-of-pocket gift tax is due. In addition, a couple can combine their exemptions to get a total exemption of $23.4 million. There's one big caveat to be aware of—the $11.7 million exception is temporary and only applies to tax years up to 2025. Unless Congress makes these changes permanent, after 2025 the exemption will revert back to the $5.49 million exemption (adjusted for inflation). So here is the big question—if this new exemption disappears after 2025, how do you take advantage of it before then?
Carolyn operates a consulting business as a sole proprietor( unincorporated). Carolyn has been approached by one of her major clients to become an employee. IF she accepts the new job, she would no longer operate her consulting business. From the standpoint of paying Social Security taxes increase or decrease if she becomes an employee? Why? ( Assume she will earn less than $200,000)
Decrease. When Carolyn operates her business as a sole proprietor, she is considered to be self-employed. A self-employment tax is imposed at the rate of 15.3% for 2018 (12.4%) OASDI + 2.9% Medicare) on all of her business income with a ceiling on the non-hospital insurance (OASDI) portion of the tax base of $128,400 in 2018. Carolyn is also entitled to an income tax deducution equal to 50% of the self-employment tax payments if she is self-employed. IF she works as an employee, however, the OASDI and Medicare taxes are imposed at the employee level at a rate of 7.65% for 2018. The OASDI is imposed on earned income up to a maximum of $128,400 in 2018 while Medicare taxes have no ceiling. Her employer would have to match Carolyn's OASDI and Medicare taxes. The three different
Why are the gift and estate taxes called wealth transfer taxes? What is the tax base for computing each of these taxes?
Gift and estate taxes are levied when a transfer of wealth (property) takes place and are both part of the unified transfer tax system. The tax base for computing the gift tax is the fair market value of all gifts made in the current year minus an annual donee exclusion of $14,000 (2016) per donee, minus a marital deduction for gifts to spouse and a charitable contributions deduction if applicable, plus the value of all taxable gifts in prior years. The tax base for the estate tax is the decedent's gross estate, minus deductions for expenses, and a marital or charitable deduction if applicable, plus taxable gifts made after 1976.
If the objectives of the federal tax system are multifaceted and include raising revenues, providing investment incentives, encouraging certain industries, and meeting desired social objectives, is it possible to achieve a simplified tax system? Explain
Probably not. It would be difficult to achieve a simplified tax system and also provide incentives to certain industries as well as achieve social objectives. To achieve a simplified tax systems would require the elimination of social purpose provisions. Achieving the simplicity in the federal income tax system is difficult and involves the trade-off of other important objectives.
Carlos inherits 100 shares of Allied corporation stock from his father. The stock cost his father $8000 and had a $25,000 FMV on the date of his father's date in 2019. The alternative valuation date was not elected. If Carlos sells the Allied corporation stock for $27,000. What is Carlos tax basis for the Allied stock when it is recieved from the estate? what would be his taxable gain on the sale? (Taxable gain= Proceeds of sale - Tax basis of stock sold)
Tax basis = shares inherited * price on date of death of father CARLOS'S TAXABLE GAIN ON THE SALE OF HIS ALLIED STOCK : Given, proceeds of sale = $27000 And the tax basis of stock sold is the FMV of the stock on the date of his father's death i.e., $25000 Therefore, Taxable Gani = $27000 - $25000 = $2000.
The Supreme Court 1895 ruled that the income tax was unconstitutional because the tax needed to be appointed among the states in proportion to their populations. Why would the requirement of proportionality be so difficult to administer?
The Supreme Court held the income tax to be unconstitutional in 1895 because the income tax was considered to be a direct tax. At that time, the U.S. Constitution required that an income tax be apportioned among the states in proportion to their populations. This type of tax system would be extremely difficult to administer because different rates of tax would apply to individual taxpayers depending on their states of residence
Carmen has computed that her average tax rate is 16% and her marginal tax rate is 24% for the current year. She is considering whether to make a charitable contribution to her church before the end of the tax year. Which tax rate is of greater significance in measuring the tax effect for her decision?
The marginal tax rate is of greater significance in measuring the tax effect for Carmen's decision. The marginal tax rate is the percentage that is applied to an incremental amount of taxable income that is added to or subtracted from the tax base. Through the marginal tax rate, the taxpayer may measure the tax effect of the charitable contribution to her church. If her marginal tax rate is 25%, she will save 25¢ for each $1 contributed to her church. The average tax rate is simply the total tax liability divided by taxable income.
Why was pay-as-you-go withholding needed in 1943?
The pay-as-you-go withholding was needed in 1943 to avoid significant tax collection problems as the tax base broadened from 6% of the population in 1939 to 74% in 1945. Pay-as-you-go permitted the federal government to deduct taxes directly out of an employee's wages.
1-3 Congressman Patrick indicates that he is opposed to tax proposals that call for a flat tax rate because the structure would not tax those individuals who have the ability to pay the tax. Discuss the position of the congressman, giving consideration to tax rate structures (progressive, proportional, and regressive) and the concept of equity.
Under a progressive tax rate structure, the tax rate increases as the taxpayer's income increases. Currently, for 2016, tax rates of 10%, 15%, 25%, 28%, 33%, 35% or 39.6% apply depending upon the taxpayer's filing status and taxable income levels. Under a proportional tax rate or "flat tax" structure, the same tax rate applies to all taxpayers regardless of their income levels. Under a regressive tax rate structure, the tax rate decreases with an increase in income level. The concept of vertical equity holds that taxpayers with higher income levels should pay a higher proportion of tax and that the tax should be borne by those who have the "ability to pay." Thus, Congressman Patrick's opposition to the flat tax is theoretically correct; all taxpayers will pay taxes at the same rate, regardless of the ability to pay
The governor of your state stated in a recent political speech that he has never supported any income tax increases as the tax rates have remained at the same level during his entire term of office. Yet, you believe that you are paying more tax this year than in previous years even though your income has not increased. How can both you and the governor be correct? Is it possible for the government to raise taxes without raising tax rates?
Yes, it is possible because there are two components in computing a taxpayer's tax, the tax base and the tax rate. Taxes can be raised by increasing either component. Thus, even though the Governor proclaimed that tax rates have remained at the same level, adjustments to the tax base, such as the elimination of deductions, result in tax increases which can be as much, or more, as increases in tax rates.
Two commonly-recognized measures of the fairness of an income tax structure are "horizontal equity" and "vertical equity" A. Discuss what is meant by horizontal equity and vertical equity as it pertains to the income tax. B. Why is it so difficult to design "fair" tax structure
a. Horizontal equity means that if two taxpayers are similarly situated and have similar incomes, then their tax liabilities should be similar The concept of vertical equity indicates that *If a taxpayer is with higher income leve, then he or she should pay a higher proportional of tax. * The tax should be paid by people with the ability to pay. Thus, under vertical equity. the taxpayer who are able to pay, that is, higher income taxpayers, should pay more tax than lower income taxpayers. b. Fairness is difficult to define. The opinions to fairness are widely divergent. Hence, the options to a "fair" tax structure are widely divergent. So, it is difficult to design a "fair" tax structure.
The three different levels of government (federal, state, and local) must impose taxes to carry out their functions. For each of the types of taxes below, discuss which level of government primarily uses that type of taxa. property taxesb. excise taxesc. sales taxesd.income taxese.employment taxes
a. Property taxes are primarily used by local government(s) and include both real property taxes and personal property taxes. b. Excise taxes are primarily used by the federalgovernment(s) and are imposed on items such as alcohol, tobacco, telephone usage, and other goods. c.Sales taxes are primarily used by state and localgovernment(s) andconstitute a major revenue source. d. Income taxes are the primary domain of thefederal and stategovernment(s) andconstitute a major revenue source. e. Employment taxes are primarily used by thefederal and stategovernment(s) andconstitute a major revenue source.
A "good" tax structure has five characteristics. a. briefly discuss the five characteristics. b. Using the five characteristics, evaluate the following tax structures: 1. Federal income tax 2. State sales tax 3. Local ad valorem property tax
a. The five characteristics of a "good" tax are equity, certainty, convenience, economy, and simplicity. Equity refers to the fairness of the tax to the taxpayers. A certain tax is one that ensures a stable source of government revenue and provides taxpayers with some degree of certainty concerning the amount of their annual tax liability. Convenience refers to the case of assessment, collectible, and administration for the government and reasonable compliance requirements for taxpayers. An economical tax requires minimal compliance costs for taxpayers and minimal administration costs for the government. Simplicity means the tax system is simple to understand and to comply. b. 1. The federal income tax meets the first four criteria reasonably well, even though many critics would suggest otherwise. The tax is reasonably fair in that the high-income taxpayers pay the most tax, the low-income taxpayers the least tax. While tax laws are constantly changing, most taxpayers have a pretty good idea of what their taxes are going to be for the tax year and the federal income tax does provide the government with a stable source of revenue. The tax is convenient to pay although compliance requirements for taxpayers have risen steadily over the years. The tax is economical for the government to collect; however, the cost of compliance for taxpayers is much too high as almost 60% of all taxpayers pay a tax preparer to prepare their tax returns. However, virtually no one would suggest that the federal income tax law is simple. In fact, complexity is one of the law's major flaws. 2. The state sales tax meets the criteria of certainty, convenience, economy and simplicity quite well. However, the sales tax is criticized as not being equitable as it tends to fall more heavily on lower and middle-income taxpayers. 3. Property taxes do not fare well according to the characteristics of a "good" tax. From equity standpoint, the property tax is imposed on property owners without regard to their income situation. Thus, a farmer may have substantial property but little income to pay the propertytax. Property taxes are certain but clearly not convenient in the sense that they are normally assessed in a lump-sum amount once a year. Property taxes do not meet the economy criteria. Property taxes are rather simple although differences in judgments as to valuation of property are a problem